Singapore Airlines

(17-05-2020, 09:36 AM)karlmarx Wrote:

(16-05-2020, 09:23 PM)Squirrel Wrote: The option to redeem lies with the issuer and the mandatory conversion only happens at maturity (so only way to prevent that is for SIA to redeem prior). Your post seems to suggest that Temasek will ultimately be the one deciding what is going to happen and not SIA. Is that due to the majority shareholding they hold? Isn’t the company supposed to do what’s best for shareholders and not pander to a portion of the investors? This is a rather unfair thought process if true and disadvantages OPMI. There is a corporate governance issue at hand as well if that’s the case.

How does the redemption or conversion of MCBs advantage SIA controlling shareholders? 

How does the redemption or conversion of MCBs disadvantage SIA minority shareholders?

The MCBs and share issue ensure that SIA will be able to remain a going concern. So at least minority shareholders -- both before and after the corporate action -- are assured that their capital will not go down to zero, although it may lose much of its value. 

The trade-off for this security is that minority shareholders will face either ownership dilution or no/low dividends; the MCBs are a loan that needs to be repaid in either of the two ways. There is no free lunch.

So it is not apparent to me how the MCB (or share issue) corporate actions may materially benefit one group of shareholders more than -- or at the expense of -- the other. I will be happy to consider other views which may convince me otherwise.

===

I don't profess to actually know how SIA or Temasek makes their decisions. But it should be clear that they are not uninterested parties who are making arms-length transactions. So there is probably more consensus than conflicting views/agendas in the boardrooms; they are more likely to see themselves to be on the same team than otherwise. After all, are these executives not cut from the same cloth?

Lengthy paragraphs on corporate governance policies and principles are an ideal, and although there is an effort to strive in the 'correct' direction, what should be does not always reflect -- or even approximate -- what is. And this applies to every other institution. Religious leaders are not supposed to sexually abuse their members, but they do. Political leaders are not supposed to steal national resources, but they do. Public company executives are not supposed to be able to walk away when they misuse company resources, but they do. And so on.

Anyway, this point is probably moot. Because, as mentioned, it is not apparent to me how the controlling shareholders are in some ways taking advantage of minority shareholders, whatever the decision (whether redeemed or converted) is taken for the MCBs.

If SIA decides to redeem the MCBs when the prevailing share price is much lower than the equivalent conversion price, this disadvantages the minority and advantages the MCB holders (also the majority shareholder Temasek here).

If SIA decides to not redeem even though business has turned around and prevailing share price is much higher than the conversion price, this advantages the MCB holders and disadvantages the minority holders.

That much is economically the most obvious thing that can happen. If the decision to redeem or not to implicitly lies with Temasek and not SIA as you said, then there is a big problem here.

(17-05-2020, 03:00 PM)Squirrel Wrote:

(17-05-2020, 09:36 AM)karlmarx Wrote:

(16-05-2020, 09:23 PM)Squirrel Wrote: The option to redeem lies with the issuer and the mandatory conversion only happens at maturity (so only way to prevent that is for SIA to redeem prior). Your post seems to suggest that Temasek will ultimately be the one deciding what is going to happen and not SIA. Is that due to the majority shareholding they hold? Isn’t the company supposed to do what’s best for shareholders and not pander to a portion of the investors? This is a rather unfair thought process if true and disadvantages OPMI. There is a corporate governance issue at hand as well if that’s the case.

How does the redemption or conversion of MCBs advantage SIA controlling shareholders? 

How does the redemption or conversion of MCBs disadvantage SIA minority shareholders?

The MCBs and share issue ensure that SIA will be able to remain a going concern. So at least minority shareholders -- both before and after the corporate action -- are assured that their capital will not go down to zero, although it may lose much of its value. 

The trade-off for this security is that minority shareholders will face either ownership dilution or no/low dividends; the MCBs are a loan that needs to be repaid in either of the two ways. There is no free lunch.

So it is not apparent to me how the MCB (or share issue) corporate actions may materially benefit one group of shareholders more than -- or at the expense of -- the other. I will be happy to consider other views which may convince me otherwise.

===

I don't profess to actually know how SIA or Temasek makes their decisions. But it should be clear that they are not uninterested parties who are making arms-length transactions. So there is probably more consensus than conflicting views/agendas in the boardrooms; they are more likely to see themselves to be on the same team than otherwise. After all, are these executives not cut from the same cloth?

Lengthy paragraphs on corporate governance policies and principles are an ideal, and although there is an effort to strive in the 'correct' direction, what should be does not always reflect -- or even approximate -- what is. And this applies to every other institution. Religious leaders are not supposed to sexually abuse their members, but they do. Political leaders are not supposed to steal national resources, but they do. Public company executives are not supposed to be able to walk away when they misuse company resources, but they do. And so on.

Anyway, this point is probably moot. Because, as mentioned, it is not apparent to me how the controlling shareholders are in some ways taking advantage of minority shareholders, whatever the decision (whether redeemed or converted) is taken for the MCBs.

If SIA decides to redeem the MCBs when the prevailing share price is much lower than the equivalent conversion price, this disadvantages the minority and advantages the MCB holders (also the majority shareholder Temasek here).

If SIA decides to not redeem even though business has turned around and prevailing share price is much higher than the conversion price, this advantages the MCB holders and disadvantages the minority holders.

That much is economically the most obvious thing that can happen. If the decision to redeem or not to implicitly lies with Temasek and not SIA as you said, then there is a big problem here.

MCB rights is traded near zero value. Which means that MCB is likely to be undersubscribed.
That being the case, MCB is as good as shareholder loan from Temasek. At 4% interest for the first four years, that seems to be reasonable to minority shareholders.

According to the document sent to shareholder, for CPFIS, to accept the rights one must use "monies standing to the credit of your CPF Investment Account". Err...what does that mean? Thanks.

It means the CPF money within the sub-limit of the CPF Investment Account that is available for shares investment -ie Stock Limit.  An online CPF query will reveal the available amount that may be used for this right issue.

(17-05-2020, 03:00 PM)Squirrel Wrote: If SIA decides to redeem the MCBs when the prevailing share price is much lower than the equivalent conversion price, this disadvantages the minority and advantages the MCB holders (also the majority shareholder Temasek here).

If SIA decides to not redeem even though business has turned around and prevailing share price is much higher than the conversion price, this advantages the MCB holders and disadvantages the minority holders.

That much is economically the most obvious thing that can happen. If the decision to redeem or not to implicitly lies with Temasek and not SIA as you said, then there is a big problem here.

1) If in ten years time SIA's prevailing share price is lower than the conversion price, then MCB holders will no doubt benefit if the MCBs are redeemed, as the capital value of their investment will not only be protected, but they will also receive an 80% return (on the tenth year). On the other hand, conversion means loss of capital value.

But if prevailing share price is below conversion price, it probably means that SIA is not doing well, which probably makes redemption of the MCBs financially difficult (i.e. no money), and hence, improbable. So conversion is more likely to take place.

Even so, SIA could arrange a $3.3b syndicate loan -- assuming no additional MCB offering -- to finance redemption of the MCBs. That would be bad for shareholders, since they SIA's gearing and interest expense will go up. But it wouldn't be unfair because SIA will be borrowing at market rates, and not relying on, as some have put it, "shareholder loans," where the terms are not at market rates. But I don't think this is a likely scenario.

2) If the prevailing share price is higher than conversion price, then a conversion of the MCBs will not be good for shareholders, because the shares are sold at what would then be a 'low' price, which causes significant dilution to NAV and EPS.

In the event that SIA does well, I think it is only fair that Temasek -- assuming that they are the ones who will eventually own most of it -- gets to choose (implicit or otherwise) whether to redeem (where they will make an 80% return on tenth year) or convert (where they will own more of SIA) their MCBs. After all, they are the ones taking the risk by underwriting not just the MCBs, but also the share offering. If no one subscribes for either, $8.8b is a lot of money to stump up. 

The conversion price of the MCB is only slightly above the TERP. So it is quite fair and does not cause significant advantage (if it is priced too low) or disadvantage (if it is priced too high) to the MCB holder, and shareholders. 

Also, the MCBs are not a private placement which is exclusively available to only a particular party who had no prior ownership interest in SIA. If anyone thinks that the MCB holders may stand to benefit and wish to participate together with Temasek -- who will probably end up owning most of it -- they are free to do so.

Shareholders cannot have it all. They cannot expect to receive both low cost and expansive financing. Or expect to have a guarantee that the company will not fail, and also all of the upside from the recovery.

To do so will be prejudicial to Temasek, who also has obligations to fund the state budget and CPF returns.

A large part of SIA losses in Q4 was due to jet fuel hedging.
The "hedging ineffectiveness" came to some $700 million.

Can anyone help explain what does "hedging ineffectiveness" mean? Does this include the mark-to-market losses for FY20/21?
If oil price moves up for this FY, will there be any reversal of the hedging losses and reflected in P/L statement?

(18-05-2020, 12:18 PM)Shiyi Wrote: A large part of SIA losses in Q4 was due to jet fuel hedging.
The "hedging ineffectiveness" came to some $700 million.

Can anyone help explain what does "hedging ineffectiveness" mean? Does this include the mark-to-market losses for FY20/21?
If oil price moves up for this FY, will there be any reversal of the hedging losses and reflected in P/L statement?

Hi,

I believe the hedge ineffectiveness arose from the use of options and collars to hedge fuel price risk and the designation of them as a cash flow hedge. I will try to explain how it works but it is a complex and technical accounting topic, so bear with me.

Basically, when applying a cash flow hedge, the company recognises changes in fair value of the designated derivatives into a cash flow hedge reserve rather than directly into the income statements. This reserves will then be used to offset any gains or losses when the hedged cashflows occur. 

However, this only applies if the hedge is deemed effective, as in the changes in the fair value of the hedging instrument offsets the change in value of the hedged transaction (in this case, likely future fuel purchases.) Any changes in fair value of the hedging instrument beyond that which can be explained by the changes in value of the hedged item will be taken directly to income statements as hedge ineffectiveness. Furthermore, if the divergence is beyond a range (80% to 125% iirc), the company will have to discontinue the accounting treatment and recognise all hedging gains and losses on that instrument immediately in the income statements.

(18-05-2020, 09:47 PM)Clement Wrote:

(18-05-2020, 12:18 PM)Shiyi Wrote: A large part of SIA losses in Q4 was due to jet fuel hedging.
The "hedging ineffectiveness" came to some $700 million.

Can anyone help explain what does "hedging ineffectiveness" mean? Does this include the mark-to-market losses for FY20/21?
If oil price moves up for this FY, will there be any reversal of the hedging losses and reflected in P/L statement?

Hi,

I believe the hedge ineffectiveness arose from the use of options and collars to hedge fuel price risk and the designation of them as a cash flow hedge. I will try to explain how it works but it is a complex and technical accounting topic, so bear with me.

Basically, when applying a cash flow hedge, the company recognises changes in fair value of the designated derivatives into a cash flow hedge reserve rather than directly into the income statements. This reserves will then be used to offset any gains or losses when the hedged cashflows occur. 

However, this only applies if the hedge is deemed effective, as in the changes in the fair value of the hedging instrument offsets the change in value of the hedged transaction (in this case, likely future fuel purchases.) Any changes in fair value of the hedging instrument beyond that which can be explained by the changes in value of the hedged item will be taken directly to income statements as hedge ineffectiveness. Furthermore, if the divergence is beyond a range (80% to 125% iirc), the company will have to discontinue the accounting treatment and recognise all hedging gains and losses on that instrument immediately in the income statements.

Thank you for the explanation.
In layman term, did SIA actually pay the counter-party $700 million in hedging losses? Or was it just mark-to-market losses, which could be reversed in subsequent FY?

(19-05-2020, 12:14 AM)Shiyi Wrote:

(18-05-2020, 09:47 PM)Clement Wrote:

(18-05-2020, 12:18 PM)Shiyi Wrote: A large part of SIA losses in Q4 was due to jet fuel hedging.
The "hedging ineffectiveness" came to some $700 million.

Can anyone help explain what does "hedging ineffectiveness" mean? Does this include the mark-to-market losses for FY20/21?
If oil price moves up for this FY, will there be any reversal of the hedging losses and reflected in P/L statement?

Hi,

I believe the hedge ineffectiveness arose from the use of options and collars to hedge fuel price risk and the designation of them as a cash flow hedge. I will try to explain how it works but it is a complex and technical accounting topic, so bear with me.

Basically, when applying a cash flow hedge, the company recognises changes in fair value of the designated derivatives into a cash flow hedge reserve rather than directly into the income statements. This reserves will then be used to offset any gains or losses when the hedged cashflows occur. 

However, this only applies if the hedge is deemed effective, as in the changes in the fair value of the hedging instrument offsets the change in value of the hedged transaction (in this case, likely future fuel purchases.) Any changes in fair value of the hedging instrument beyond that which can be explained by the changes in value of the hedged item will be taken directly to income statements as hedge ineffectiveness. Furthermore, if the divergence is beyond a range (80% to 125% iirc), the company will have to discontinue the accounting treatment and recognise all hedging gains and losses on that instrument immediately in the income statements.

Thank you for the explanation.
In layman term, did SIA actually pay the counter-party $700 million in hedging losses? Or was it just mark-to-market losses, which could be reversed in subsequent FY?

There is not much information to go on but I would think SIA would have been required to put up additional margin or collateral, so money most likely did change hands.

As to whether the instruments will recover in value, it really depends on the instruments themselves. Given the size of the hedge ineffectiveness, I suspect it is the collars which caused the problem. In this case, some of the options might have expired or, as collars also involve writing options, might have been exercised by the counter party. SIA’s oil prices were also hedged at a high level, so the options will probably be quite far out of the money and be of very minimal value.

(18-05-2020, 07:15 AM)karlmarx Wrote: To do so will be prejudicial to Temasek, who also has obligations to fund the state budget and CPF returns.

Since many of us have CPF, i probably have to correct the "misunderstanding" above that CPF returns are dependent on Temasek.

There is some structural intricacies with how CPF generate its returns:

CPF buys SSGS --> SSGS bonds are guaranteed by Spore Gov --> the monies from SSGS are then held by MAS with GIC acting as the Fund Manager.

https://www.mof.gov.sg/policies/our-nati...bligations

The SSGS proceeds have not been passed to Temasek for management. Temasek hence does not manage any CPF monies